Tag Archives: interest rates

The Fed’s tightening plan sounds like my fat buddy’s diet plan at my workplace. He still scarfs down his usual 2 Big Macs a day (sometimes 3), but has lately taken to washing it down with a diet Coke instead of a regular Coke. “Gotta watch my weight”, he recently told me. – comment from “Marcus”

Sometimes I wonder if the Fed is just toying with the financial media and economic analysts. The Fed’s constant threat to raise rates and unwind its balance sheet seems to be taken seriously by most commentators. Even the few analysts I respect, like David Stockman, include the assumption the Fed will reduce its balance sheet by a few hundred billion per year.

And yet, nearly 5 years past Bernanke’s “taper speech” the Fed Funds rate has been barely lifted off the zero-bound and the Fed’s balance sheet has been reduced only ever so slightly. Every meeting it’s pretty much the same story: “FED LEAVES RATES UNCHANGED IN UNANIMOUS VOTE *FED: ECONOMY TO `WARRANT FURTHER GRADUAL INCREASES’ IN RATES” (the graphic to the right was hypothecated from an article tweeted by @RudyHavenstein – note the date of publication).

In today’s statement, the Fed comments that “inflation to stabilize around 2% medium-term.” First of all, what the hell does “medium-term” mean? And in what parallel universe is the Fed calculating its 2% inflation rate? Food prices are soaring; healthcare premiums rose anywhere from 20% to 100%; home prices allegedly are up at least 10%; energy prices are rising at a clip well beyond 2% per annum.

The Fed’s nefarious “Quantitative Tightening” has been a complete joke. The “weight loss” program was supposed to commence in October. On October 11th, the Fed’s balance sheet $4.221 billion. As of last Wednesday, the Fed’s balance sheet was $4.203 trillion – down $18 billion. The Fed is not even shedding its promised $10 billion per month. The SOMA account, which is where the disclosed bond purchases reside, is also about $18 billion lighter since mid-October. Note: “disclosed” as opposed to the off-balance sheet asset purchases held in off-shore accounts like the Swiss National Bank and the Belgian Central Bank. But the mortgage holdings in the SOMA account have actually increased $3 billion since mid-October. You can see for yourself here – SOMA account – and here – Fed Balance Sheet.

If the economy is doing so well and there’s a shortage of houses (allegedly) and a shortage of labor, why is the Fed adding to its mortgage holdings and why is the Fed – in a unanimous vote – leaving rates unchanged? “Economists” like Moody’s Mark Zandi assert that the labor market and economy is “in danger of over-heating.” If that’s the case, why are rates being held down at historically low levels? Why does the Fed threaten rate hikes but never follows-through? It’s the same story after every meeting. The market prices in a 95% chance of a rate-hike for the next meeting. And then, just like Lucy does to Charlie Brown with the football when he goes to kick it in “Peanuts,” the Fed folds the cards in its hand and waits for the next deal.

According to Goldman Sachs’ financial conditions index, it’s never been easier to get a loan. In fact, outstanding debt at every level of the economic system hits a new record pretty much daily. The Treasury Secretary is now begging Congress to raise the debt ceiling. The amount of Treasury debt outstanding will easily increase in excess of trillion dollars this year, as it has every year since 2007.

In truth, the economy is starting to fold faster than the Fed folds at every FOMC meeting. Credit card and auto loan defaults are beginning to soar. We’re at levels on both that were last seen in late 2008. The problem is, we have not had a crisis yet. The market, regardless of the unwillingness of the Fed to tighten its monetary policy, is starting to take care of that for the Fed. The yield on the 10yr Treasury has nearly doubled since July 2016. It’s up 60 basis points since August.

Mortgage rates, despite the Fed’s willingness to inject money into the mortgage market, are at 4-year highs. This is going to wreak havoc on the demand for homes. This is because most homebuyers buy a monthly payment, not a home. It won’t take much of a move higher in rates, combined with the changes in the new tax law, to make that monthly mortgage payment unaffordable for most prospective homebuyers.

What would happen to interest rates if the Fed actually followed through on its threats and began hike rates up to a level which reflected the rate of inflation and actually reduced its Treasury and mortgage holdings according to the schedule Yellen outlined last year?

Predictably, after the gold price has been pushed down in the paper market by the western Central Banks – primarily the Federal Reserve – negative propaganda to outright fake news proliferates.

The latest smear-job comes from London-based Capital Economics by way of Kitco.com. Some “analyst” – Simona Gambarini – with the job title, “commodity economist,” reports that “gold’s luck has run out” with the 25 basis point nudge in rates by the Fed. She further explains that her predicted two more rate hikes will cause even more money to leave the gold market.

Hmmm…if Ms. Gambarini were a true economist, she would have conducted enough thorough research of interest rates to know that every cycle in which the Fed raises the Funds rate is accompanied by a rise in the price of gold. This is because the market perceives the Fed to be “behind the curve” on rising inflation, something to which several Fed heads have alluded. In fact, the latest Fed rate hike, on balance, has lowered longer term interest rates, as I detailed here: Has The Fed Really Raised Rates?

Furthermore, to which “gold market” is Ms. Gambarini referring? There’s the fractional paper gold markets of NYC and London and the physical importation and bullion trading markets in the eastern hemisphere. While she does indeed acknowledge the upswing in gold demand coming from India and China, she downplays its significance. Currently India and China are importing more physical gold than at the same time last year. Several other smaller markets have been actively importing significantly more gold now than at the same time last year (Turkey, for example).

Finally, Ms. Gambarini – unbelievably – states that “she sees less safe-haven demand supporting the market as geopolitical concerns have started to disappear.” I don’t even know how to respond to that idiotic assertion considering that Russian and U.S. military jets are antagonistically engaged in the sky over the Middle East as I write this. Either Ms. Gambarini is tragically incompetent at her chose profession or she is purposely propagating fake news.

If Ms. Gambarini was smart enough to do thorough research on the topic or was interested in reporting the truth, she explain that, at least 80% of the time, the gold price rises during Asian trading hours and falls during NYC/London hours, like today:

The mining stocks have been strong relative to the price of gold this week. My bet is that this reflects the likelihood that the latest price-takedown of gold in the paper market has run its course. The dramatic drop in Comex paper gold open interest, as well as a drop in the net short position of the Comex bullion banks and a drop in the net long position of the hedge funds (per the COT report), reinforces the signal transmitted by the mining stock this week.

Any flinch from the Fed in its alleged desire to tighten its monetary policy, or if a “spark” hits the growing geopolitical powder-keg in the Middle East, and gold will quickly shoot over $1300 on its way to much higher levels.